From Wikipedia, the free encyclopedia

A cartel is a formal (explicit) agreement among
competing firms. It is a formal organization of producers
that agree to coordinate prices, marketing and production.[1] Cartels
usually occur in an oligopolistic industry, where there is a
small number of sellers and usually involve homogeneous products. Cartel members may
agree on such matters as price fixing, total industry output, market shares,
allocation of customers, allocation of territories, bid rigging,
establishment of common sales agencies, and the division of profits
or combination of these. The aim of such collusion is to increase individual members'
profits by reducing competition. Competition
laws forbid cartels. Identifying and breaking up cartels is an
important part of the competition
policy in most countries, although proving the existence of a
cartel is rarely easy, as firms are usually not so careless as to
put agreements to collude on paper.[2][3]

Several economic studies and legal decisions of antitrust
authorities have found that the median price increase achieved by
cartels in the last 200 years is around 25%. Private international
cartels (those with participants from two or more nations) had an
average price increase of 28%, whereas domestic cartels averaged
18%. Fewer than 10% of all cartels in the sample failed to raise
market prices.

Origin

The term cartel came up for alliances of
enterprises round about 1880 in Germany.[4] The
name was imported into the Anglosphere during the 1930s. Before
this, other, less precise terms were common to denominate cartels,
for instance: association, combination,
combine or pool.[5] In the
1940s the name cartel got an Anti-German bias, being the
economic system of the enemy. Cartels were the structure
the American Anti-Trust-campaign struggled to ban globally.[6]

Private
vs public cartel

A distinction is sometimes drawn between public and
private cartels, though there is no evidence that Public
Cartels are less harmful to the general good, and being Government
backed they are much more effective and hence potentially harmful.
In the case of public cartels, the government may establish and
enforce the rules relating to prices, output and other such
matters. Export cartels and
shipping conferences are examples of public cartels, as well as labor
unions. In many countries, depression cartels have been
permitted in industries deemed to be requiring price and production
stability and/or to permit rationalization of industry
structure and excess capacity. In Japan for example, such arrangements have been
permitted in the steel, aluminum
smelting, ship building and various chemical
industries. Public cartels were also permitted in the United States
during the Great Depression in the 1930s and
continued to exist for some time after World War II in industries such as coal mining and oil
production. Cartels have also played an extensive role in the
German economy during the inter-war period.
International commodity
agreements covering products such as coffee, sugar, tin and
more recently oil (OPEC) are examples of international cartels with
publicly entailed agreements between different national
governments. Crisis cartels have also been organized by
governments for various industries or products in different
countries in order to fix prices and ration production and
distribution in periods of acute shortages.

In contrast, private cartels entail an agreement on terms and
conditions from which the members derive mutual advantage but that
are not known or likely to be detected by outside parties. Private
cartels in most jurisdictions are viewed as being illegal and in
violation of antitrust laws.[2]

Long-term
unsustainability of cartels

Game theory
suggests that cartels are inherently unstable, as the behaviour of
members of a cartel is an example of a prisoner's
dilemma. Each member of a cartel would be able to make more
profit by breaking the agreement (producing a greater quantity or
selling at a lower price than that agreed) than it could make by
abiding by it. However, if all members break the agreement, all
will be worse off.

The incentive to cheat explains why cartels are generally
difficult to sustain in the long run. Empirical studies of 20th
century cartels have determined that the mean duration of
discovered cartels is from 5 to 8 years. However, once a cartel is
broken, the incentives to form the cartel return and the cartel may
be re-formed.

Whether members of a cartel choose to cheat on the agreement
depends on whether the short-term returns to cheating outweigh the
long-term losses from the possible breakdown of the cartel. (The
equilibrium of a prisoner's dilemma game varies according to
whether it is played only once or repeatedly.) The relative size of
these two factors depends in part on how difficult it is for firms
to monitor whether the agreement is being adhered to by other
firms. If monitoring is difficult, a member is likely to get away
with cheating (and making higher profits) for longer, so members
are more likely to cheat and the cartel will be more unstable.

There are several factors that will affect the firms' ability to
monitor a cartel:[7]

Number of firms in the industry.

Characteristics of the products sold by the firms.

Production costs of each member.

Behaviour of demand.

Frequency of sales and their characteristics.

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Number of firms in
industry

The lower the number of firms in the industry, the easier for
the members of the cartel to monitor the behaviour of other
members. Given that detecting a price cut becomes harder as the
number of firms increases, the bigger are the gains from price
cutting.

The larger the number of firms, the more probable it is that one
of those firms is a maverick firm; that is, a firm known
for pursuing aggressive and independent pricing strategy. Even in
the case of a concentrated market, with few firms, the existence of
such a firm may undermine the collusive behaviour of the
cartel.[7]

Characteristics of products
sold

Cartels that sell homogeneous
products are more stable than those that sell differentiated products. Not
only do homogeneous products make agreement on prices and/or
quantities easier to negotiate, but also they facilitate
monitoring. If goods are homogeneous, firms know that a change in
their market share
is probably due to a price cut (or quantity increase) by another
member. Instead, if products are differentiated, changes in
quantity sold by a member may be due to changes in consumer
preferences or demand.[7]

Production
costs

Similar cost structures of the firms in a cartel make it easier
for them to co-ordinate, as they will have similar maximizing
behaviour as regards prices and output. Instead, if firms have
different cost structures then each will have different maximizing
behaviour, so they will have an incentive to set a different price
or quantity. Changes in cost structure (for example when a firm
introduces a new technology) also give a cost advantage over
rivals, making co-ordination and sustainability more difficult.[7]

Behaviour of
demand

If an industry is characterized by a varying demand (that is, a
demand with cyclical fluctuations), it is more difficult for the
firms in the cartel to detect whether any change in their sales
volume is due to a demand fluctuation or to cheating by another
member of the cartel. Therefore, in a market with demand
fluctuations, monitoring is more difficult and cartels are less
stable.[7]

Characteristics of sales

If each firm's sales consist of a small number of high-value
contracts, then it can make a relatively large short-term gain from
cheating on the agreement and thereby winning more of these
contracts. If, instead, its sales are high-volume and low-value,
then the short-term gain is smaller. Therefore, low frequency of
sales coupled with high value in each of these sales make cartels
less sustainable.[7]

Antitrust law on cartels

General
view

International competition authorities forbid cartels, but the
effectiveness of cartel regulation and antitrust law in general is
disputed by economic
libertarians.[8]

United
States

The Sherman Antitrust Act of 1890
outlawed all contracts, combinations and conspiracies that
unreasonably restrain interstate and foreign trade. This includes
cartel violations, such as price fixing, bid rigging and customer allocation.
Sherman Act violations involving agreements between competitors are
usually punishable as criminal
felonies.[9]

European
Union

The EU's competition law
explicitly forbids cartels and related practices in its article 81 of the Treaty of Rome. Since The Treaty of Lisbon
came into effect, the 81 EG is replaced by 101 AEUV. The article
reads:

1. The following shall be prohibited as incompatible with the
common market: all agreements between undertakings, decisions by
associations of undertakings and concerted practices which may
affect trade between Member States and which have as their object
or effect the prevention, restriction or distortion of competition
within the common market, and in particular those which:

(a) directly or indirectly fix purchase or selling prices or
any other trading conditions;

(b) limit or control production, markets, technical
development, or investment;

(c) share markets or sources of supply;

(d) apply dissimilar conditions to equivalent transactions with
other trading parties, thereby placing them at a competitive
disadvantage;

(e) make the conclusion of contracts subject to acceptance by
the other parties of supplementary obligations which, by their
nature or according to commercial usage, have no connection with
the subject of such contracts.

2. Any agreements or decisions prohibited pursuant to this article
shall be automatically void.
3. The provisions of paragraph 1 may, however, be declared
inapplicable in the case of:

- any agreement or category of agreements between
undertakings,

- any decision or category of decisions by associations of
undertakings,

- any concerted practice or category of concerted
practices,

which contributes to improving the production or distribution of
goods or to promoting technical or economic progress, while
allowing consumers a fair share of the resulting benefit, and which
does not:

(a) impose on the undertakings concerned restrictions which are
not indispensable to the attainment of these objectives;

(b) afford such undertakings the possibility of eliminating
competition in respect of a substantial part of the products in
question.

Article 81 explicitly forbids price fixing and limitation/control of
production, the two more frequent cartel-types of collusion. The EU competition law
also has regulations on the amount of fines for each type of cartel
and a leniency policy by which, if a firm in a cartel, is the first
to denounce the collusion agreement it is free of any
responsibility. This mechanism has helped a lot in detecting cartel
agreements in the EU.

Examples

People of the same trade seldom meet together, even for
merriment and diversion, but the conversation ends in a conspiracy
against the public, or in some contrivance to raise
prices.

An example of a new international cartel is the one created by
the members of the Asian Racing Federation and
documented in the Good Neighbor Policy signed on September 1, 2003.
Other well-known examples include:

Organization of the Petroleum Exporting Countries (OPEC): As its name suggests, OPEC is
organized by sovereign states. It cannot be held to antitrust
enforcement in other jurisdictions by virtue of the doctrine of
state immunity under public international law. However, members of
the group do frequently break rank to increase production
quotas.

In economics, a cartel is a group of formerly independent companies overtly agree to work together. The objectives of cartels are to increase their profits or to stabilize market sales. They do this by fixing the price of goods, by limiting market supply or by other means. Monopolies are not cartels, because in a monopoly there is only one independent company. Cartels are bad for the economy in general and for their customers who are overcharged. Cartels usually occur in oligopolies, where there are a small number of players that control the majority of supply in a market.

Besides the sellers' cartel just described, buyers may also form cartels to suppress the price of a purchased input. Another type of cartel is the bidding ring. In bid rigging potential suppliers form an agreement as to which of them will win a supply contract at a price above the competitive price and, if one of them wins, then agree to a rule for sharing the extra profits among themselves. Bid rigging is most common among construction firms trying to get a government building project.

Overview

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

A survey was done of hundreds of published economic studies and legal decisions of antitrust authorities. It found that the median price increase achieved by cartels in the last 200 years is 25%. Private international cartels (those with participants from two or more nations) had an average price increase of 28%. Domestic cartels averaged 18%. Less than 10% of all cartels in the sample failed to raise market prices.

In general, cartel agreements are difficult to negotiate because potential members typically have different ideal collusive prices. Once formed, cartels tend to be economically unstable, primarily because there is a profit incentive for members to cheat by selling at below the agreed price or selling more than the production quotas set by the cartel (see also game theory). Cheating on prices is difficult for cartel members to observe, so more successful cartels often agree to fix their market quotas, share verifiable information about those shares, and agree in advance on some mechanism to punish members that exceed their quotas. This has caused many cartels that attempt to set product prices to be unsuccessful in the long term. Empirical studies of 20th century cartels have determined that the mean duration of discovered cartels is from 5 to 8 years. However, once a cartel is broken, the incentives to form the cartel return and the cartel may be re-formed. Publicly-known cartels that do not follow this cycle include the Organization of the Petroleum Exporting Countries (OPEC).

Price fixing is often practiced internationally. When the agreement to control price is sanctioned by a multilateral treaty or protected by national sovereignty, no antitrust actions may be initiated. Examples of such price fixing include oil whose price is partly controlled by the supply by OPEC countries. Also international airline tickets have prices fixed by agreement with the IATA, a practice for which there is a specific exception in antitrust law.

International price fixing by private entities can be prosecuted under the antitrust laws of more than 100 countries. Examples of prosecuted international cartels are lysine, citric acid, graphiteelectrodes and bulk vitamins.